Preferreds trade off on ECB confusion; banks lose ground; PennyMac gets temporary symbol

By Stephanie N. Rotondo

Seattle, June 29 – The preferred stock market edged lower in Thursday trading, following along with the broader equity markets.

The Wells Fargo Hybrid and Preferred Securities Index was off 19 basis points. The U.S. iShares Preferred Stock ETF was down 29 bps.

The weakness in the space came despite Wednesday’s news that all U.S. banks had received Federal Reserve approval on their capital plans.

“Yes, banks had good news, but there is much concern about the tech sector,” a market source noted. “Plus, a hawkish comment from the [European Central Bank] didn’t help bonds.”

The source was referring to comments made by Mario Draghi, head of the ECB, on Tuesday in which he indicated that Europe’s central bank need to be “prudent” as it “gradually” considers ending its stimulus program.

At first, the markets seemed to think that such a tapering was just a matter of time. However, other ECB sources were then cited as saying that Draghi’s comments were misinterpreted and that an end or reversal of the program was not yet in play.

Still, there remain expectations that the ECB will announce an end to the monetary easing plan later this year, to go into effect sometime in 2018.

Back in the United States, banks reversed the upward trajectory seen on Wednesday.

Given that all 34 U.S. banks had their capital plans OK’d – only Capital One Financial Corp. received conditional approval – there is a belief that banks will start redeeming existing preferreds – and possibly start issuing new preferreds again.

“We will most likely see the higher coupon issues called,” one trader said. In particular, he noted a CreditSights report that indicated Citigroup Inc.’s 7.875% fixed-to-floating rate trust preferreds (NYSE: CPrN) was one issue “most likely” to be called.

In fact, CreditSights went to far as to recommend selling that issue in favor of Ally Financial Inc.’s 8.125% series 2 fixed-to-floating rate trust preferreds (NYSE: ALLYPrA).

But one source wasn’t so sure that was the best idea.

“We think the CreditSights guys did not appropriately factor in the after-tax cost,” he said.

Plus, it may be too early to determine who will or won’t start redeeming issues.

“It is mostly speculation as to banks and issues,” he said.

For its part, Citi’s 7.875% TruPs fell 35 cents, or 1.33%, to $25.94. The issue was the day’s top trader, with about 1.63 million of the securities trading.

Ally’s TruPs were not as active, but did manage to rise a penny to $26.00.

PennyMac, SCE get symbols

PennyMac Mortgage Investment Trust’s $175 million of 8% series B fixed-to-floating rate cumulative redeemable preferreds – a deal that priced on Tuesday – were assigned a temporary ticker early in the day, according to a market source.

The symbol is “PNNMP.”

PennyMac’s new paper rose 15 cents to $24.85. With over 1.2 million of the preferreds trading during the session, it was the second most active issue of the day.

When it priced on Tuesday, the deal came at the tight end of the 8% to 8.125% price talk and was upsized from $75 million.

Morgan Stanley & Co. LLC, Keefe, Bruyette & Woods Inc. and RBC Capital Markets ran the books.

The dividend rate will begin to float on June 15, 2024 at Libor plus 599 basis points. The paper also becomes redeemable on that date.

Meanwhile, Southern California Edison Co.’s SCE Trust VI’s $475 million of 5% series L trust preference securities listed on the New York Stock Exchange on Thursday under the ticker “SCEPrL.”

At the close, a source called the issue 5 cents weaker at $24.95.

A trader saw the issue “around $24.92” at mid-morning.

The deal came to market on June 19, increased from $200 million and tighter than the 5.125% to 5.25% price talk.

J.P. Morgan Securities LLC, Morgan Stanley, RBC Capital Markets and Wells Fargo Securities LLC were the bookrunners.

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